BEING THE RIGHT KIND OF INVESTORS
By Matthew Montgomery
In our blogs, we attempt to give a broad brushstroke view of who we are and how we view different aspects of the energy industry. While our last blog was about the mechanics of royalty buying, and our recent quarterly reports have circled around the wider supply and demand dynamics, this blog is about being in the right place at the right time (which is where we think we are).
My favorite questions to ask when someone is selling an investment idea are, “Why this opportunity?” “Why now?” and “Why is it available to me?” Through our recent musings on the period of “structural deficit” we are entering, you’ve gotten a sense of how we answer “Why this, why now?” Now for a bit of reflection on why we think we are the right kind of investors for this market in this day and age.
Big money has turned its back.
If we turn the clock back a decade or two, the oil and gas industry was all about “big”. As they say, “Everything’s bigger in Texas.” It was big oil, big companies, big operations, and BIG money. The way the game worked back then was to find an opportunity, get big institutional firms to sponsor you, build up the company, and then sell it off to even bigger institutions and/or publicly listed companies. This is actually what I did in the early years of my career. One firm I worked for built two companies up to $700-800M in size and then sold them off for $2.5 billion to a publicly listed company. And this was not an uncommon story – “enter, scale, turn to sale” was the mantra. But things have changed.
For one thing, the big drilling craze (think 2005-2015) of the horizontal drilling shale revolution has settled into its mature adult stage of life, so the industry’s production growth isn’t quite as dramatic. But more importantly, as we’ve mentioned before, big money (think institutional capital managers, public pensions and large private equity shops) is just not “into it” anymore. Big money comes with big publicity and, if you are a big institution, having your name tied to unfashionable industries is not good for business. When we say “big money,” think of the $27B endowment of the Mayo Clinic, or the $300B Teachers’ Pension Fund of the State of California, just to name a few. Regardless of your take on ESG (Environmental, Social and Governance), the mindset of investment priority of these institutions has meant a dramatic drying up of capital investment for the oil and gas industry.
However, with this macro headline component—we stay focused (join us) on a whispered & lingering question: Has demand or supply dropped off? Nope, not even close.
Enter the family offices and nimble funds.
This is such a fundamental shift. Twenty years ago, single and multi-family offices would have really struggled to get into these opportunities. But now more and more folks are seeing their chance. I had the glad opportunity to get down to Ft. Worth last month to meet with some LPs. At every meeting, people were asking “Do you mind if I bring some friends in to meet you?” Birds of a feather after all. All of these folks represented small business owners, small family offices, or aggregated family offices run by a CEO. There’s a lot of excitement about this shift, these folks have a lot of appetite! There is a real feeling that this is our era, with the right scale of capital, in the right industry, at the right time. Family. Life. Investing. Feels so fitting in this era, doesn’t it?
The need is still there.
With the need for carbon sources of energy nowhere near being supplanted by renewables and the sources of energy still at the midpoint of their production lifecycle, this remains a fundamentally strong market, regardless of what the ESG mentality would have to say about it. In October alone, two of the biggest oil companies in the world made headlines-grabbing purchases of “smaller” oil and gas-producing firms for over $50 billion each, locking in domestic production and signifying their commitment to hydrocarbons for the foreseeable future. Don’t be confused by these mergers however; regarding the source of new capital that’s available for new companies to join the market or get involved in drilling and production, the traditional sources have all dried up.
The right team, at the right time.
Of course, having the capital and a hungry market doesn’t get minerals on a balance sheet. It takes a lot of time to build up the expertise necessary to source and buy quality royalties with upside potential. That is why we at Maevlo are thankful to be in a position where we have the deep roots, skills, relationships, and contacts needed to help folks get access to this essential resource. Our ability to find and buy at a small scale and aggregate means we can put together significant collections of assets that give meaningful mineral exposure to family offices and smaller investing outfits like the ones we are blessed to work with.
“Blessed” is a word we use intentionally. There is much in this industry that is out of our control. So we recognize with gratitude what a gift it is that we find ourselves in the right place, with the right asset, and, most importantly, the right partners, at the right time.
